The government’s stake in Citi: Why only 40%?

The WSJ is reporting that Treasury is thinking about converting the preferred shares in Citi that cost it $45 billion (and that’s not counting government guarantees of a $301 billion Citi loan pool) into a 25% to 40% share of the company’s common stock. This even though all the common shares of Citi could (in theory, at least) have been purchased this morning for just over $10 billion.

The movements of Citi’s stock price have been driven lately mainly by speculation over how the government will treat current shareholders if it does any more bailing out of the bank, so it’s hard to say what exactly that $10 billion market cap really signifies. Still, the deal being envisioned at the moment doesn’t seem like a good one for taxpayers. And while I get why the Paulson Treasury, at the height of the panic last fall, put averting financial collapse ahead of getting the best possible deal for the government, it’s far less clear to me why the Geithner Treasury should be doing anything but trying to drive a hard bargain with the most troubled big banks. The financial panic (at least the particular panic that gripped markets last fall; I’m not saying there won’t be another, different one later) has passed. Now the goal should be to reboot the financial system. To do that you need to force out most of those shareholders and managers who are still hoping against hope for a return to the old financial system. And a 40% stake in Citi doesn’t really seem to get us to that point.